FOMC meet to disappoint; no action likely: NAB

Given that there has been no outcome with regard to the Greece exit from the Eurozone, investors are likely to be more positive towards European markets, said Nick Parsons from National Australia Bank. The election results have helped to successfully avoid a catastrophe.

While the market is priced in for some action from the Fed, Parsons is of the opinion that there is scope for disappointment from this Wednesday’s Federal Open Market Committee (FOMC). According to him, “It (the market) has even started to think that the Fed is going to announce QE3 by Wednesday. We do not share that belief. We believe that the live meeting is the one on August 1, the Fed will have had one more payroll figure and it will have its own estimates of the July payroll figures when we get to August 1.” Below is an edited transcript of his interview. Also watch the accompanying video. Q: European markets may witness a gap up opening today. Do you expect a sustainable upside on the back of the Greece elections or will this rally fizzle out? A: I think it’s going to be more of the same. There is no outcome for Greece, which is essentially going to be a good one. There is no outcome which will make investors feel a lot more positive towards Europe or its markets. What we have managed to do very successfully is avoid a catastrophe. But the markets here are just showing a small amount of relief. I think it’s, by no means, clear to say that we have posted sustainable lows just yet. Q: The Fed will be announcing its decision on Wednesday. What are you expecting from the event? A: I think the market is priced in for some action from Fed. The market has priced for the very minimum for an extension of operation twist where they buy more longer dated securities at the expense of shorter dated ones. It has even started to think that the Fed is going to announce QE3 by Wednesday. We do not share that belief. We believe that the live meeting is the one on August 1, the Fed will have had one more payroll figure and it will have its own estimates of the July payroll figures when we get to August 1. So our guess is that there is scope for disappointment from this Wednesday’s Federal Open Market Committee (FOMC). Q: Do you think there will be some kind of a pullback in equity and other risk assets? Also what are you expecting from events related? A: I think disappointments in the market would be expressed by a modest pullback in risk assets. But it is very unlikely that we will see an absolute rout. The G-20 meet is going on in Mexico. At any point, we are going to see statements around their commitment to liquidity and their willingness and ability to stand ready to provide funds to the market should be necessary. So I think a lot of people are expecting that this will be an enormously exciting week. I take the opposite view; I think enormous amount of resources have been expended in preparing the market for what eventually is more likely to be a very dull few trading days. I think it will catch a lot of people offside in the wrong foot. Q: What about the Spanish bond auction? On that day, we will also get some decision on whether Spain will get that USD 100 billion it is asking for bank bailout. Could Thursday be one of those interesting days therefore? A: I think it could be. On the bond side, we are quite likely to see the ECB step up its securities market purchase program. I think we will see a lot more talk around funds being made available. Crucially, we are also going to see quite a bit of talk about a relaxation of the terms of the Greek bailout. That relaxation will merely take the form of extending the time period for compliance. I don’t think they are going to relax the conditions; they are merely going to extend the time. But as we hear more about that and especially in the run-up to the EU Summit in Brussels on June 28, the mood in the bond market will be somewhat calmer. That calmness in the bond market is hopefully going to offset the disappointment, which could well be likely from a fact that there is nothing on Wednesday.